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Venture capital is very different today than it was in the 1980′s
when the industry experienced a wave of growth in response to
changes in tax and pension laws. Back in the days when Apple
Computer and Genentech were young start-ups, venture capitalists
made smaller investments in earlier stage companies with less
follow on funding than they do now.

Today it’s not surprising to hear that companies like Facebook or
Groupon have raised over $350 million in a single venture capital
round. But back in the early 1980s no companies were raising
those amounts ($150 million back then in real dollar terms).

Investment rounds are bigger now than they used to be. If we
exclude the anomalous bubble years of 1999 and 2000 when the
average venture capital investment round reached $20.6 and $36.1
million (in 2008 dollars) respectively, initial investment rounds
are much higher now than they were in the 1980s and 1990s.
National Venture Capital Association (NVCA)
numbers reveal that over the ten year period from 1989 through
1998, the average venture capital round was only $3.8 million (in
2008 dollars). From 2001 to 2010, it was $5.9 million (in 2008
dollars). That’s a 55 percent increase in real dollar terms.

What led to this dramatic rise in the size of venture
capital investment rounds? Two causes jump out from the
data. The first is a sizeable increase in the amount of follow on
funding provided by venture capitalists, which now dwarfs initial
funding in a way that was not the case in earlier years. The NVCA
data show that in 2010, venture capitalists made $4.10 in follow
on investments for every dollar they initially invested in young,
high growth companies. While this ratio is down slightly from its
record in 2009, it remains far higher than it used to be. Before
2001, the ratio of follow on investment to initial funding had
never even reached 3:1.

A second reason for the increased size of venture capital rounds
has been a movement toward later stage investments. Although the
share of early stage investments has inched back up over the past
several years, it remains low by historical standards. From 2001
to 2010, seed and start-up stage investments averaged only 8.9
percent of the total. By contrast, for the period from 1991 to
2000 early stage investments accounted for 18.7 percent of all
investments and for the decade from 1981 to 1990, they averaged
25.1 percent.

Although it once was, the venture capital industry is no longer
about making small, early stage investments in high potential
companies. Today venture capital is much more about larger, later
stage deals involving much follow on financing.